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Ruling means Subchapter S banks to pay back taxes

CHICAGO (8/11/09)--A ruling finalized in July would require nearly 1,500 Subchapter S banks to pay three years of back taxes on municipal bond investments. The privately held banks could end up paying tens of millions of dollars if the ruling, by Judge Maurice B. Foley in favor of the Internal Revenue Service in the U.S. Tax Court, stands (American Banker Aug. 10). The banks are taxed under the Subchapter S rules of the Internal Revenue Code. Usually profits at S Corps are taxed only at the shareholder level and the corporations reimburse their owners for tax mistakes. The cost for the banks could range from $6 to nearly $300,000, said Baker Group LP, an Oklahoma City community banking consulting firm. The firm said that total S Corp banks nationwide would have owed $21.6 million for 2008, if the tax ruling had been in effect then. The statute of limitations for overdue taxes is three years. The ruling was finalized July 13. A lawyer at Godfrey & Kahn SC in Milwaukee, which will represent the owners of First Forest Park Corp., in Illinois in its appeal, noted the case is a test case for all Subchapter S bank. Some said this is the last chance for the banks to appeal the decision.